FFBL 26-11-14
- 1. Foundation Research Equities Fauji Fertilizer Bin Qasim Diversification strategy could be a game changer Event The recent drive to diversify its business can be a game changer for Fauji Fertilizer Bin Qasim (FFBL), in our view. After taking exposure in the banking (AKBL) and power sector (FFCEL), the company plans to take advantage on domestic demand theme (Food and Power). Recently, the company announced its intention to enter the dairy business via acquisition of Noon Pakistan (NOPK) whereas its meat and coal power projects are already underway. Our preliminary calculations suggest valuation upside of 13% to our current target price of PKR44/share from aforementioned projects (excluding NOPK). Sighting potential upside and CY15E DY of 10.0%, we upgrade our stance from Neutral to Outperform. Impact Significant upside may come from acquisition of NOPK: To further diversify its product line FFBL has shown its intention to acquire majority stake of NOPK (both voting and non-voting shares). With FY14 topline of PKR2.2bn at 7% capacity utilization, NOPK is principally engaged in dairy & juice business under the brand name of Nurpur. With modalities still to be decided, NOPK provides an ideal opportunity to take exposure on theme of domestic demand. We have taken a sample of 6 listed food companies comprising Nestle, Efoods, National Foods, Ismail Industries, Shezan and Quice foods to gauge the potential impact of the acquisition on FFBL. Though it is premature to quantify the acquisition impact, our analysis using P/S hints a potential upside in the range of PKR3-5/sh to our current valuation given yesterdays closing. Footprints in meat business: FFBL is also diversifying itself into meat business through an investment of US$58mn (debt:equity 70:30) in Fauji Meat Limited (FML). The core purpose of the project is processing of halal meat, value added products and by products with special focus on international markets i.e. UAE, KSA, Qatar, Bahrain, Kuwait, Malaysia and Iran along with domestic markets. The plant would have processing capacity of 100tons per day out of which 85% is of beef while remaining 15% constitutes mutton. In addition, company is also planning to build a feedlot flattening facility consisting of 3,000-4,000 animals to meet international standards. The project is likely to commence operations from 4QCY15. As per our assumption, initially FML would operate at capacity of 30%, which will increase to 90% over the period of six years (CY17-22). This would generate positive TP impact of PKR2.0/sh on FFBLs books. Coal power plant to curb gas curtailment: In an environment of poor gas availability, decision to set up coal power plant of 110MW would not only provide operational flexibility but also provide dollar dominated return on its electricity supply to national grid (~70MW). This project would cost around US$130mn and will likely come online in CY18. Our estimates suggest an addition of PKR3.5/sh to our current valuations (TP impact of PKR1.3/sh from PAKISTAN 26 November 2014 FFBL PA Outperform Stock price as of 25 Nov Rs 42.4 Jun 15 target Rs 44.2 Upside/downside % 4.3% Valuation Rs 44.2 - SOTP Fertilizer Market cap Rs bn 39.6 30-day avg turnover US$m 0.4 Market cap US$m 392 Number shares on issue m 934 Investment fundamentals Year end 30 Dec 2013A 2014E 2015E 2016E Total revenue mn 54,455 4 2,171 55,557 6 1,626 EBIT mn 9,877 6 ,183 8,005 8 ,267 EBIT Growth % 19.13 (37.40) 29.48 3 .27 Recurring Profit m 5,613 3 ,172 4,684 4 ,766 Reported Profit m 5,613 3 ,172 4,684 4 ,766 EPS rep Rs 6.01 3 .40 5.01 5 .10 EPS rep growth % 29.39 (43.48) 47.67 1 .75 EPS rec Rs 6.01 3 .40 5.01 5 .10 EPS rec growth % 29.39 (43.48) 47.67 1 .75 PE rep x 7.06 1 2.49 8.46 8 .31 PE rec x 7.06 1 2.49 8.46 8 .31 Total DPS Rs 4.75 3 .25 4.25 4 .25 Total div yield % 11.20 7 .66 10.02 1 0.02 ROA % 14.42 8 .96 13.03 1 2.18 ROE % 42.49 2 3.29 33.62 3 1.94 EV/EBITDA x 4.81 9 .02 6.74 6 .49 Net debt/equity % 112.94 1 46.37 119.86 1 14.22 Price/book x 2.87 2 .94 2.75 2 .57 FFBL PA rel KSE 100 performance 1.60 1.40 1.20 1.00 0.80 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 KSE FFBL Source: Bloomberg, Foundation Research, November 2014 (all figures in PKR unless noted) Analyst Muhammad Awais Ashraf m.awais@fs.com.pk 92 21 5612290 Ext 339 Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such Information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. 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- 2. Fauji Fertilizer Bin Qasim November 26, 2014 electricity supply & PKR2.2/sh through fuel stock savings). Price Catalyst Jun-15 price target: PKR44.3/sh based on SOTP valuation method. Catalyst: Materialization of acquisition of NOPK along with start operations of FML and coal power plant. Earnings Revision We have revised down our CY14/15 earnings by ~30/4% on the back of subdued margins and fluctuations in income from associates. Action & Recommendations Sighting potential upside and CY15E DY of 10.0%, we upgrade our stance from Neutral to Outperform. The stock is currently trading at CY15E and 16E P/E of 8.5x and 8.3x respectively. 2 Foundation Securities (Pvt) Limited
- 3. Fauji Fertilizer Bin Qasim November 26, 2014 Company Profile Fauji Fertilizer Bin Qasim is the sole DAP and Granular urea producer in Pakistan. Initially named as FFC-Jordan Fertilizer Company (FJFC), FFBL was formed on 17th Nov 1993, with FFC (30%), FF (10%) and JPMC (10%) as main sponsors. The company was formally listed with stock exchanges in May 1996 and commercial production commenced wef Jan 2000. The company was renamed as Fauji Fertilizer Bin Qasim Ltd. (FFBL) in 2003, as Jordan Phosphate Mines Co. (JPMC) had sold its entire equity in the company. FFC currently owns a 51% stake in FFBL. FFBL is listed on all the three stock exchanges of the country. 3 Foundation Securities (Pvt) Limited